Tax Recovery After a Casualty Loss

Q. My home suffered major damage after a tornado. Do I get a tax break for a disaster like this?

A. Possibly. When a natural disaster, such as a tornado or hurricane strikes your home or business, the results can be devastating – especially if the losses aren’t fully covered by insurance or your insurance claim is contested.

Fortunately, you may be able to get help from Uncle Sam by claiming a casualty loss deduction on your tax return. If your region is officially designated as a “presidentially declared disaster area” you don’t even have to wait until you file your next tax return. You may be able to file an amended return and get a quick tax refund for fast financial relief.

Assuming you qualify, your casualty or theft loss deductions for personal property are limited in two ways:

You can’t deduct the first $100 of any casualty.

You can only write off casualty losses when the total amount in one year (reduced by the $100 per casualty amount) exceeds 10 percent of your adjusted gross income (AGI). The amount of the loss for real estate is the difference between the property’s fair market value before and after the loss, reduced by any insurance proceeds, or the adjusted basis if that is less.

Example: Let’s say the tornado damage to your home is estimated at $200,000. But the insurance only covers $150,000. Your AGI is $100,000. After subtracting $100, your deductible loss is limited to $39,900 ($49,900 minus 10 percent of $100,000).

However, there are no limits on losses for business or income-producing property such as rental real estate. In other words, you can write off business losses without applying the 10 percent limit or the $100 per casualty amount applied to personal losses. So if your business suffered $50,000 of damage that was not reimbursed by insurance, the entire amount would be deductible (assuming your tax basis in the damaged assets was at least $50,000).

To claim a property loss, for tax and insurance purposes, you must be able to prove that a disaster took place. Keep copies of newspaper clippings and police reports. Take photos or videos after a casualty. If you have any “before” and “after” pictures or videotapes, they can help back up casualty loss claims of the disaster. This kind of detailed documentation may also be necessary to get insurance reimbursement and to apply for FEMA grants and SBA loans.

In addition to compiling records and other proof, you may also have to substantiate the value of the property loss by getting an independent appraisal from a real estate expert. (The cost of the appraisal and the cost of obtaining photographs or videos may be deductible as a miscellaneous expense.)

What Qualifies for Tax Purposes?

To get a casualty tax write-off, damage must be caused by a “sudden, unexpected or unusual” event such as a hurricane, earthquake, tornado, fire, flood or storm. Auto collisions and thefts can also qualify. (There is no deduction for damage that results from gradual deterioration, such as destruction caused by termites or drought.)

Workbooks Available

The IRS has workbooks to help individuals and businesses figure their casualty or theft loss deductions. Click here for the workbook covering losses of personal property and click here for losses involving business or income-producing property.

Consult with your tax adviser for more information about claiming deductions after suffering a casualty.